BROWN-FORMAN DISTILLERS CORPORATION
CASE 51: BROWN-FORMAN DISTILLERS CORPORATION
1. Why is Brown Forman considering buying Southern Comfort?
As a leading producer, marketer and importer of wines and distilled spirits, Brown-Forman (BF) was the fifth-largest distiller in the United States. In the late 1970’s, the whiskey market declined and this presented BF with growth challenges in a mature market. BF’s response to market pressures and competition was to aggressively attempt into other faster growing divisions of the alcohol beverage market which required to expand its product lines. The company intended to increase advertising of $86 million to massively promote its alcoholic product lines. The company also realized that future growth was very dependent on it gaining access to foreign markets.
Due to those obstacles, Southern Comfort (SC) seems to be an attractive horizontal acquisition for BF with the following advantages and disadvantages.
Advantages:
20% of the SC sales were overseas. Its exports market also had the highest 5-year compound growth rate compared to other markets
The company developed a distinctive brand with loyal customers
SC being a liqueur does not need to age and can be produced and sold much faster than the traditional whiskey line.
With an acquisition, shareholders value will lead to an increase in both earning per shares and the share value.
Strong balance sheet with higher than average sales/assets ratio of 2.49 in 1977, the company has more profitable assets that can generate more earnings by minimizing the fixed cost per unit as a result of higher production levels. SC is a profitable company with a profit/sales ratio as high as 7% on par with BF. BF has a low debt/equity ratio; over the past few years the firm has placed itself in an outstanding financial position, which has brought about the higher levels of debt that they can use to finance new acquisitions and other investment opportunities. Similarly, SC was never sold at a discount by its
1. Why is Brown Forman considering buying Southern Comfort?
As a leading producer, marketer and importer of wines and distilled spirits, Brown-Forman (BF) was the fifth-largest distiller in the United States. In the late 1970’s, the whiskey market declined and this presented BF with growth challenges in a mature market. BF’s response to market pressures and competition was to aggressively attempt into other faster growing divisions of the alcohol beverage market which required to expand its product lines. The company intended to increase advertising of $86 million to massively promote its alcoholic product lines. The company also realized that future growth was very dependent on it gaining access to foreign markets.
Due to those obstacles, Southern Comfort (SC) seems to be an attractive horizontal acquisition for BF with the following advantages and disadvantages.
Advantages:
20% of the SC sales were overseas. Its exports market also had the highest 5-year compound growth rate compared to other markets
The company developed a distinctive brand with loyal customers
SC being a liqueur does not need to age and can be produced and sold much faster than the traditional whiskey line.
With an acquisition, shareholders value will lead to an increase in both earning per shares and the share value.
Strong balance sheet with higher than average sales/assets ratio of 2.49 in 1977, the company has more profitable assets that can generate more earnings by minimizing the fixed cost per unit as a result of higher production levels. SC is a profitable company with a profit/sales ratio as high as 7% on par with BF. BF has a low debt/equity ratio; over the past few years the firm has placed itself in an outstanding financial position, which has brought about the higher levels of debt that they can use to finance new acquisitions and other investment opportunities. Similarly, SC was never sold at a discount by its